Joe Fairless (JF): Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluff.
With us today, Craig Cecilio (CC). How are you doing, Craig?
CC: Good, Joe. How are you doing today?
JF: I’m doing well, and nice to have you on the show. A little bit about Craig – he is the CEO and founder of DiversyFund. He has participated in development of over 1,000 single-family residences as joint venture equity partner, as well as a lender or sponsor. He’s financed nearly one billion (with a B) dollars of real estate assets, having raised over 100 million in debt or equity in the last three years. You’ve been very busy!
Based in sunny San Diego, California… With that being said, Craig, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
CC: Thanks for the introduction, I appreciate it. Yeah, it sounds like I’ve been busy, or it sounds like I’m just kind of getting old, not sure which one it is exactly… [laughter] But yeah, I founded a crowdfunding platform in 2014, combining my love of technology and real estate.
I started in real estate in 1998. I started doing real estate syndication in 1999. It was a different market back then, of course. When I saw the opportunity to get involved in taking an older business, such as real estate syndication, and combining technology with it and getting online, I got really excited; I’m all in, and it’s been quite a journey in the last few years of getting the platform up and running.
The last 12 months we’ve been focusing on making it a vertically-integrated platform, and that’s a platform where we are the developer or co-developer on all our projects. We chose that route – one it was for better transparency, better control, better reporting, and we just felt like that was the way to go to minimize the risk for the investor when they were trying out the platform, to give them a better user experience. We thought that would be a win/win for both parties.
JF: Certainly a differentiating feature, because I haven’t come across too many – I can’t think of any, perhaps you can – platforms that are a co-developer on all the projects, versus being a meeting place for the investor and the sponsor to meet, and then they just facilitate the introduction. Why did you choose that approach?
CC: Part of that was my experience of doing a lot of transactions, and by being a third-party sponsor or lending the money to somebody else, there is gonna be a number of deals that may go South; it’s just your plan against the odds there. And we thought that “Hey, if we did this, how do we minimize that from happening? How do we make that actually go away?” Our goal is not to have anything go South on our platform.
We kind of really thought about that hard, and we started doing a lot of research, and I started looking at “Okay, we’re talking about giving investors an alternative investment vehicle, maybe give most investors their first-time investment in real estate.” Also, giving them higher returns than they would find in a stock market, in traditional savings and bonds accounts.
We kind of put that all together and just said “It’s very risky if you’re gonna give your money to a third-party, but if we can create an institutional quality product and give a double-digit return to somebody, how would we do that?” and this is what we came up with. We said the best way to do this, to protect all parties, was to create a vertically-integrated platform.
JF: I get from your side definitely why to do it, from a profitability standpoint, because (I’m guessing) you’re making more money as a co-developer than someone who would facilitate the process and take an asset management fee or some sort of fee… So I get that. The challenge that I’d like to ask about is – I don’t know if it is or it isn’t a challenge – having another sponsor come on board and say “Yeah, you know what, Craig? I’m in. And I’m okay with you all co-developing with me to get access to the investors on the platform.” Have you come across that challenge?
CC: Yes and no. I would say it’s not really a challenge. Alan (my partner) and I have been in the real estate industry for about 20 years, so we have a pipeline of up to a billion dollars right now coming at us, but we have also kind of looked at how do we take this to the next level and how do we allow that opportunity to third-parties, and we’re open to that.
We have certain stages and phases to our development, so right now we’re gonna go through our pipeline, and then reassess the market. We do this every year, reassess where the market is, and then decide, “Hey, do we stick with our pipeline? Is that pipeline correct where the market is headed, or do we go out and change direction and open this up to other people?” So it’s very dynamic, very process-driven, but we are opening up to taking other people’s projects aboard as well.
JF: Okay, for what percent would you say are just your projects, versus you’re partnering with another developer or sponsor?
CC: Right now it’s 100% us, and our pipeline I would say is pretty good; that’s gonna be 100% us. But I see as soon as we hit around $400m-$500m mark, which we believe will be year 2019, then we’ll start taking in other people.
JF: Okay. Why create a crowdfunding platform to do all this, versus just doing one-off syndications, or even creating a fund?
CC: That’s a good question. First, we created the platform to allow anyone, anywhere in the U.S. to invest in our projects. Right now we’re doing Reg D offerings, which means anyone, anywhere who goes in who’s accredited can invest in these in real time through the website. We’re also in the process with the SEC to get the Reg A+ offering accepted, which means the non-accredited investor will be able to participate as well. We’re opening this up to people who haven’t had the opportunity to participate in real estate investing… So a lower barrier to entry.
Our barrier to entry is only $5,000 today. It’s gonna be as low as $500 we’re anticipating in February 2018. So as a customer or investor, you can learn a little bit about the real estate process by investing in our platform, as well as participate in development projects, in projects that are kind of way outside the realm of where you’d ever get contacted to participate in.
Most of our transactions and projects have minimum amounts of five million dollars of equity in them. So these are kind of very large projects that the general public does not have access to.
JF: As far as you mentioning any accredited investor in the US can invest, that sounds like it’s 506(c), where you can publicly advertise, but you have to have a third-party verification process to make sure that they’re accredited. So why not just do 506(c) offering, versus creating a platform?
CC: It is a 506(c) platform. You create the platform so you create the technology, so you could have more people fulfill a project, fulfill an offering. It’s leveraging technology. It’s having people do the whole process, from soup to nuts, on the website itself.
JF: Okay, so basically it’s automating the process.
JF: So you can put an ad in The New York Times, “Invest in this deal”, because it’s 506(c), and instead of having an administrative assistant or someone else on your team to e-mail or phone call and talk about the opportunity, they just go to the website, they see the opportunity, and then they can invest directly and it cuts out the people time involved.
CC: Yeah, it does. And it cuts out a lot of middle-men on the way as well. A lot of these offerings get fulfilled by funds of funds, broker-dealers, brokers… It takes fees representing people to put their money into projects like this. We have a lot of funds of funds coming to us. So that person could directly go in and get that full return.
JF: How much does it cost to build a platform?
CC: It cost a lot to build a platform. I think more importantly than cost is perseverance, it’s being able to keep your company going and at the same time investing dollars into the platform itself. It’s well north of seven figures, but there’s a lot of moving parts to it. You have to invest in the technology, you have to invest into the people… Then investments in real estate itself. We have our own money in some of the real estate projects. You have to invest a lot into marketing, and PR… It’s quite a bit of money that you have to put into it.
JF: Knowing what you know now, before you got started, would you still do it?
Craig Cecilio: I knew you were gonna ask that question.
JF: Well, once you said North of seven figures, obviously I have to ask that question.
CC: I’m a pretty driven guy; I just felt like I was kind of born to do this, because I’ve been syndicating for so long, and I kind of had an idea of how do I use technology, so how do I syndicate this project and get it done more quickly, and I needed technology to do that. I had an idea way back in the early 2000’s about trying this out. So I would say, yeah, the cost would never get in the way of me. I would figure it out.
If you do something for a long period of time, you have an idea – “Okay, this can accelerate the process more.” But I think the biggest motivator for me above everything was how exclusive it was. I learned from a lot of wealthy people about this investment and saw how they made a lot of money over the years, and it wasn’t open to everyone. How did I find out about it? I had just a side conversation with someone who taught me about this and all of a sudden I’m like, “Wow, a whole different world exists out there.”
Today it’s a little different than it was 20 years ago. To make something that’s exclusive, make it inclusive – that was the major motivator. The second motivator that I have which is just as big is “How do I do this and do something different?”
We always focus on just real estate developments, returns… How do we do this and fund projects that can make an impact on society?
How we could do a project to bring a different type of architecture to an area, and how do we fund a project that might change some of the general landscape of blighted areas?
If you look at some of the investment that we have on our site right now, we’re kind of going down that path, choosing more socially-impactable projects. That’s kind of where we wanna focus with this. It’s not only “Give someone a return”, but “Let someone participate in doing something that’s different”, and I think that’s what the crowd allows that to happen, whereas if you went through traditional means to get that, people are more just focused on the returns and numbers, not the creativity component.
JF: Yes, I can see that. And you read my mind, that’s actually where I was going next, on the types of projects that you’re doing. Can you give us a specific example of one?
CC: Sure. There’s a housing shortage in San Diego, so they had a high-density bonus if you created more affordable housing units in certain parts of town. So we were able to buy a blighted property that’s in a very centralized part of San Diego, and we’re gonna build about 57 apartments and about 5,000 square feet of commercial space. So it takes this area where there’s not a lot of housing, it takes an area where it’s kind of older houses, an older area of town, and we’re gonna bring new architecture there, have some affordable units… We’re trying to make it very friendly for electric cars. It’s in a predominant LGBT community… Just kind of really bringing creativity to the area and everything.
JF: And what are the main metrics that you look at whenever you’re assessing an opportunity like that?
CC: I don’t wanna over-simplify that one… Just, I’ve been around that particular market and I have the relationships, I’ve known some people for 20 years and it kind of just fell on my laps, this one, with the passage of these ordinances. So what we’re looking at is more of a value-add, how can we add value to the properties in specific areas.
In every area throughout the US there’s probably codes and opportunities out there if you really dive deep into the zoning and the entitlements in those specific communities. They’re everywhere, you just have to do the research on them. And really your value-add is where you’re going in, you’re changing the zoning or some zoning that passed, where you could take a traditional area that was one way and make it another way. So going in, when you’re buying the property, you’re kind of buying at the right price to make a profit on it, or to give it a good return.
JF: What are some of the successful value-add strategies you’ve implemented?
CC: That would be one of them. Another one is bringing a new architectural design to a community. I think that would be the second one, and that’s probably a very big one. A couple other ones… We did a student housing project, modernized a property that was entitled a certain way, where for instance a property had a single-family residence on it and the zoning said you could build up to 16 units of apartments. That was a student housing project that we did, we added some value there.
What we’re trying to do now is doing the added value as well as bringing an architect or a new designer at the same time, so we’re kind of doing both – that would be the best choice if we could do that, just depending on the numbers of the transaction.
JF: How do you pencil the numbers for bringing in an architect, to see that you have a return on investment?
CC: I think that comes down to more relationship than anything else… Building the right partnerships with the right people. It has to work out for them as well. They might get some good press, they might become potential partners in their next project. It basically just comes down to building relationships with the right people, creating a project that creates a little buzz, that people wanna participate in, and sharing in the benefits of that.
JF: But you have to pay them before you receive any profit on your end, right? Because they’re doing work. Or are you saying because you’ve created buzz and you’ve positioned it a certain way, they’re not being paid cash out of pocket before you receive money?
CC: Oh, we make sure that we pay people. So we are paying them, but we could pay them more at a cost basis than we have to do for an added benefit if it was a complete stranger doing architectural design for us.
JF: Okay. When you look at a project, how do you determine if it makes sense to bring in an architect and pay them, versus not bringing an architect and just maybe modernize a student housing property and not use an architect?
CC: Well, for us it’s a fairly simple question and answer, but to answer the question, I think for us, we’re gonna choose the project that it pencils for us… So we have the right relationships to get those projects. But for most people, they don’t pencil. That’s one of the reasons where I survived real estate for the last 20 years comes in handy and having those relationships in place to get those deals. You have your network of people finding you the deals, you have the next partners that are willing to give you the cost that makes sense…
It’s just building relationships, and I think a lot of that is at the end of the day how you are looking at some of these things we might be talking about, if you’re getting started in real estate, it’s kind of developing win/win relationships with people, where everyone is benefitting together, and growing that. And to put yourself in a position where we are today, because of that.
It’s a long process, it’s a fun process, and it is a reality. But just to say “Hey, I’m just gonna go do that today”, where it took us 20 years to build out – that might not happen. I’m not saying it’s gonna take 20 years, it could take a lot less time than that, but it’s just building the relationships and the partnerships and just having an eye for it. We found our niche; properties 5 to 25 million dollar range is more of our niche of product right now, and we’re able to do that project size where it doesn’t really affect our bottom line.
JF: For someone who’s looking to engage an architect for the first time on a project, say they don’t have the pre-existing relationships that you’ve built, what should they expect from a cost standpoint for how architects charge their fee on projects?
CC: It’s gonna be tough for them. You’re gonna have to save some costs in a certain way. If you’re gonna pay market for something, you’re gonna have to look to buy the property at the right cost. Is there a way you can get your construction done a little cheaper? Are you the contractor on that? Are you the real estate agent or are you gonna make it up somewhere? You have to kind of measure it out… It’s like, “If I’m not paying market in one area, I have to have a discount in a different area.”
That’s kind of like being a developer, juggling all those different hats and all those different analytics, and just kind of putting it all on a spreadsheet and say “Hey, if I’m gonna pay market for somebody, how do I pay less for something else to even this up for it to make sense on the spreadsheet?”
JF: And roughly what is market, would you say?
CC: It just depends on the project. I don’t have an exact number for you. Each market would be different.
JF: Got it. Based on your experience, what is your best real estate investing advice ever?
CC: That is a great question. It’s a hard, hard choice, and you don’t wanna go there, but put me in the position where I am today on a deal, it’s having the ability to say no. It’s just to turn down a deal. I remember the market crashed, I’m looking at a hundred deals. I might be doing one.
You’ve just gotta kind of use reason when you’re underwriting something. Don’t do a deal just because you have to do a deal. I think that would be my biggest advice, to say no. And I don’t think people say no enough. And it doesn’t make sense for some people, but I look at all those deals I passed on in the downtrend, which if I, I could have gotten in trouble on, and it was because I said no a lot. My best advice is to persevere.
JF: On the saying no front, what filters do you use? And I know there’s many and this could be a three-way conversation, so feel free to take this whatever direction you want… But what filters do you use that help you quickly identify that it is a gonna be a no?
CC: I would say if we’re talking about a deal that we’re gonna be the developer on, we’re the owner on, I would just say location if I’m not familiar with that location. I wanna have a really good understanding of the location of the property. It’s like, “Well, it’s a little bit outside the neck of the woods I traditionally sold.” That’s what I would start with – are you familiar with that location? That’s where I would start.
There’s a lot of places where you can do deals, and if you’re not familiar with that, I think that’s where you start.
JF: Why would you start there?
CC: A variety of reasons. If you’re in a new market and you don’t know about how to get permits, the city, the county, who’s making the decisions in those areas, you don’t have the relationships or no people have relationships in those areas…
On the resale side, if you’re reselling an asset, are you in an area that’s gonna sustain a correction? Are you in an area where you usually understand street-by-street what happens? Every city has certain cities within the city, or sectors within the city; not knowing those intricacies of those neighborhoods, you might be doing the wrong product in the wrong neighborhood. Even though on paper it’s the same city, you might just not know that specific neighborhood in that.
So there are a lot of things to look out for, but if you’re a real expert in that city itself and you’re familiar with that, you would know those things.
JF: Are you ready for the Best Ever Lightning Round?
JF: Let’s do it. Best ever book you’ve read?
CC: I would say it’s The Law Of Success by Napoleon Hill.
JF: Best ever deal you’ve done that we haven’t talked about?
CC: I did a small 90k deal, turned it around for 375k nine years ago. It was a quick turnaround.
JF Turnaround in what period of time?
CC: 120 days.
JF: What’s a mistake you’ve made on a transaction?
CC: Didn’t ask for enough money, enough fees…
JF: Best ever way you like to give back?
CC: I’ve sat on a board of a non-profit for four years. Fantastic experience. We actually won an Academy Award on one of the students that we had. It was a phenomenal experience, and I’m still proud to be a part of that.
JF: And how can the Best Ever listeners get in touch with you and learn more about your company?
CC: Easy, go to our website, diversyfund.com. A bunch of ways to check us out, a bunch of ways to communicate with us – through e-mail, through Intercom, through phone call.
JF: Well, thank you for being on the show, Craig, and thanks for talking to us about your venture, DiversyFund, and also why you created the platform, the vertical integration component, as well as a specific example of a project that you’ve done, the housing shortage challenge that San Diego has, and your solution with the affordable housing build, with the 57 apartments, the 5,000 square feet commercial space, as well as just from a macro level, what you look for from a value-add standpoint, and then one of the filters that you use to disqualify a deal, and that is if you’re not comfortable with the location.
Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.
Craig Cecilio: Great. Thanks, Joe. I appreciate it.